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Debt reduction strategies

Everything you need to know about taking control of your debt.

For many of us, dealing with debt is an unfortunate side effect of everyday life. Whether it’s a home loan, credit card debt, car loan, personal loan or a combination of any of the above, debt can place you under huge financial pressure and be completely overwhelming.

But there’s plenty you can do to reduce your debt and seize back control of your finances. There are several debt reduction strategies available to help you get back in the black, so let’s take a closer look at each of them to work out which one is right for you.

Understanding debt

No two debts are the same and because of this, there is no one surefire way to reduce your debts. One of the main problems people run into is having too many separate debts to manage. If you take out a car loan, have multiple credit cards or a mortgage, then managing your repayments can get complicated. The first thing to do is to sit down and work out all of the different lenders you owe money to, how much money you still owe, what you are paying in interest and how much your repayments are. Then you can get a realistic amount which you're putting towards your debts each month.

When you break all of these debts down, you can identify the lenders to which you are paying the highest interest rates and fees. For example, you may have a couple of credit cards with higher interest rates than the others, or you may be paying more in unsecured personal loan fees and interest than you are for a car loan. By understanding your debts you can decide on an appropriate strategy to manage them. No matter how many separate debts you have to how many lenders, there are several debt reduction strategies which can help you take control of your repayments and better manage your debt. Take a look below at the debt reduction strategies which you may want to consider.

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Strategy #1: Snowball method

If you’ve done any research at all into taking charge of debt, you’ve probably heard of the snowball method.This debt reduction strategy gets its name from its ‘start small and get bigger’ approach to paying off your debts. The basic premise is simple: start by paying off the smallest debt first, then work up to the larger ones.

To get started, make a list of all your debts from the smallest amount to the largest. Don’t worry about the interest rate attached to those debts unless two amounts are the same – when this occurs, pay off the debt with the highest interest rate first.

Once you’ve finalised your list, it’s then a matter of making the minimum repayment on all debts except the smallest amount. For this debt, repay as much as you can afford each month until it is completely repaid, and you can then move on to the next amount on your list.

Why should you consider the snowball method?

The strength of the snowball method lies in its ability to let you start repaying your debts one small step at a time. As your debts are paid off one by one, your confidence in your financial management skills will grow and you may be able to gather the momentum you need to climb your personal mountain.

When might the snowball method not work?

The downside of this method is that it won’t always be the most cost-effective way to get out of debt. In many cases, tackling the largest debt or the amount accruing the highest rate of interest is the best place to start.

Strategy #2: Avalanche method

The snow theme continues with the avalanche method, which is also known as debt stacking. Rather than listing debts in order from the smallest to the largest amount, this method involves listing your debts from the highest interest rate to the lowest interest rate. Don’t worry about the dollar amount unless the interest rates on two separate debts are the same, in which case you pay off the higher amount first.

From this point on the process is quite similar to the snowball method. Pay the minimum payment on all debts except the one with the highest interest rate, towards which you should contribute as much as you can afford each month. Once this debt is repaid, move on to the next amount on your list.

Why should you consider the avalanche method?

The avalanche method is usually seen as a logical choice when selecting a debt reduction strategy. This is simply because it’s a more cost-effective way to pay down your debts, allowing you to spend as little as possible to get back on track.

When might the avalanche method not work?

The downside of the avalanche method is that it can initially take a while to pay off debts. While the snowball method provides quick gratification and the psychological boost of paying off small debts first, the avalanche approach doesn’t offer the same instant rewards. As a result, some people can become discouraged and lose their disciplined approach to debt repayment.

Strategy #3: Debt tsunami method

Many finance experts advise leaving your emotions out of it when reducing your debt – after all, letting our hearts rule our heads is one of the ways many of us ended up in debt in the first place. But the debt tsunami method, named by Adam Baker from Man vs Debt, advocates a different approach.

The idea behind the debt tsunami approach is to pay off your debts in order of their emotional impact. Instead of worrying about the amount you owe or the interest rate that applies, prioritise the debts that have the greatest psychological weight.

For example, while a $5,000 credit card debt at 15% p.a. may be costing you the most, you may first want to pay back the $1,000 your best friend loaned you interest-free when you fell on hard times.

Why should you consider the debt tsunami method?

While it’s impossible to deny the logic of finding the most cost-effective way to reduce debt, it’s also hard to go past the emotional influence debt can have over our lives. The strength of this approach lies in its ability to allow you to reduce the psychological impact of debt, and to find the necessary motivation to seize control of your finances.

When might the debt tsunami method not work?

The unavoidable truth is that there are cheaper ways to reduce your debt than the debt tsunami approach. If paying off your debt in the most cost-effective way possible is important to you, consider other options.

Strategy #4: Balance transfer credit cards

Have you accumulated debt across multiple credit cards? Are you struggling to manage the repayments and high interest rates for each separate credit card debt?

If so, you might be able to bring your credit card debt under control by consolidating multiple credit card accounts onto a single credit card with a balance transfer. There are myriad balance transfer credit cards available that let you move your debt over to a new card and take advantage of no interest charges for an introductory period – for example, 0% p.a. on balance transfers for the first 6 months.

Some credit card providers will also let youbalance transfer personal loan debt, providing another flexible option to help you bring your finances under control.

Why should you consider a balance transfer credit card?

It’s common knowledge that credit card interest rates can be painfully high, so taking advantage of a no-interest-rate period can be an excellent way to bring your debt under control. Only having to make one monthly repayment rather than several separate repayments for each individual debt can also make it much easier to manage your money.

When might a balance transfer credit card not work?

If you’re thinking of applying for a balance transfer credit card, remember that you’ll typically need a good credit history in order to be approved. You should also be aware that some card providers charge a balance transfer fee, and check the fine print to find out what interest rate will apply when the introductory period ends.

Rates last updated April 24th, 2018
% p.a.

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Name Product Balance transfer rate (p.a.) Purchase rate (p.a.) Annual fee Amount Saved Product Description
NAB Low Fee Platinum Card - Exclusive Offer
0% p.a. for 25 months
19.74% p.a.
$90 p.a.
Ends 6 May 2018.
finder Exclusive: Take advantage of 0% p.a. interest for 25 months on balance transfers with no balance transfer fee.
HSBC Platinum Credit Card
0% p.a. for 22 months with 2% balance transfer fee
19.99% p.a.
$129 p.a.
Offers a 0% p.a. for 22 months balance transfer and an annual fee refund each year when you spend $6,000. Plus, complimentary travel insurance.
Westpac Low Rate Card
0% p.a. for 24 months with 2% balance transfer fee
13.49% p.a.
$59 p.a.
Offers a 0% for 24 month balance transfer option, up to 55 days interest-free on purchases and a competitve 13.49% p.a. purchase interest rate.
St.George Vertigo Platinum - Online Offer
0% p.a. for 24 months
12.74% p.a.
$99 p.a.
Platinum card benefits including complimentary insurance, plus 0% p.a. for 24 months on balance transfers (with no BT fee). Ends 30 April 2018.
Virgin Money Low Rate Credit Card
0% p.a. for 14 months
11.99% p.a.
$49 p.a.
Offers a discounted annual fee, $100 cashback when you meet the spend requirement and up to 14 months on balance transfers. Ends 30 June 2018.
HSBC Low Rate Credit Card
0% p.a. for 20 months with 2% balance transfer fee
13.25% p.a.
$79 p.a.
Receive up to 20 months interest-free on balance transfers with a 2% BT fee. Also enjoy exclusive offers with the home&Away Privilege Program.
Virgin Australia Velocity Flyer Card - Bonus Points Offer
0% p.a. for 18 months
20.74% p.a.
$64 p.a. annual fee for the first year ($129 p.a. thereafter)
Earn up to 60,000 bonus Velocity Points in the first 3 months and enjoy a discounted annual fee of $64 for the first year. Ends 30 June 2018.
St.George Vertigo Visa
0% p.a. for 18 months with 1% balance transfer fee
13.74% p.a.
$55 p.a.
Enjoy a 0% p.a. for 18 months balance transfer offer. Plus, up to 55 days interest-free on purchases.
Citi Simplicity Card
0% p.a. for 15 months with 1.5% balance transfer fee
19.99% p.a.
$0 p.a.
Save with 5% cashback on eligible purchases (capped at $50 per month) for the first 90 days from approval. Plus, a 15 month balance transfer offer.
St.George Rainbow Vertigo Visa
0% p.a. for 18 months with 1% balance transfer fee
13.74% p.a.
$55 p.a.
Available until 26 September 2018, all the great low cost features of the Vertigo Visa with a rainbow design in support of the LGBT community.

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Strategy #5: Debt consolidation personal loans

Juggling multiple repayments can be costly and confusing, so you may want to consider consolidating all those debts into a single personal loan. Debt consolidation personal loans allow you to cut down the total amount you pay in interest charges, while it can also help you save money on fees.

There are unsecured personal loans available, or you may also be able to find the right loan by accessing the equity you have in your home. You also have the flexibility to choose a fixed- or variable-rate loan.

Rates last updated April 24th, 2018
Interest Rate (p.a.) Comparison Rate (p.a.) Min Loan Amount Loan Term Application Fee Monthly Repayment
NAB Personal Loan Unsecured Fixed
An unsecured personal loan with a competitive fixed rate that you can make additional repayments to without penalty.
11.99% (fixed) 12.87% $5,000 1 to 7 years $150 Go to site More
SocietyOne Unsecured Personal Loan
Based on your risk profile, you will receive a tailored rate between 7.5% and 20.49% with a SocietyOne personal loan.
From 7.5% (fixed) 9.51% $5,000 2 to 5 years 3% (of loan amount) Go to site More
Latitude Personal Loan (Unsecured)
An unsecured loan with a tailored rate from 13.99% p.a. to 29.99% p.a. designed for multiple purposes including renovating, buying a car or travelling.
From 13.99% (fixed) 15.19% $3,000 2 to 7 years $250 (Loans under $4000 - $140) Go to site More
MyState Unsecured Personal Loan
Apply for up to $50,000 and make additional repayments at any time without penalty.
12.99% (variable) 16.42% $3,000 1 to 7 years $200 Go to site More
Westpac Unsecured Personal Loan
Borrow up to $50,000 for a term of up to 7 years with this unsecured loan.
12.99% (fixed) 14.14% $4,000 1 to 7 years $250 Go to site More
NAB Personal Loan Unsecured Variable Rate
An unsecured loan up to $55,000 that you can repay early without penalty.
15.69% (variable) 16.55% $5,000 1 to 7 years $150 Go to site More

Why should you consider a debt consolidation personal loan?

Debt consolidation personal loans can help reduce your interest payments and loan fees – you only have to pay interest and monthly fees on one loan, not across several debts. They can also make it easier for you to manage your finances, as you only have to worry about making regular repayments on one loan.

When might a debt consolidation personal loan not work?

Many lenders will only accept borrowers with a good credit history, so finding funding from a reputable lender can be difficult for borrowers with bad credit. You’ll also need to read the fine print and make sure you’re fully aware of the interest rate, fees and charges that apply to a debt consolidation loan so you can be sure it will actually save you money.

Strategy #6: Part 9 debt agreements

A part 9 (or part IX) debt agreement is a binding agreement between you and your creditors. When you enter into one of these agreements, you commit to pay a sum of money that you can afford in order to settle your debts.

A part 9 debt agreement is an act of bankruptcy which, while different from declaring yourself bankrupt, can have serious financial consequences. With this in mind, you’ll need to carefully consider your options before deciding whether it’s the right choice for you.

Why should you consider a part 9 debt agreement?

If you’re under significant financial pressure and struggling to repay your debts, a debt agreement can help you avoid bankruptcy, get your creditors off your back and stop you sinking even further into the red.

When might a part 9 debt agreement not work?

You should consider all other debt reduction options before entering into a debt agreement. Not only will the debt agreement appear in your credit file for five years but your name will also be entered on the National Personal Insolvency Index (NPII) for a limited period of time. This can have a huge impact on your ability to access credit.

And if you fail to keep up with the repayment schedule outlined in the agreement, you can lose your secured assets and your creditors could apply to the court to have you declared bankrupt.

Which debt reduction strategy is right for you?

This depends on a range of factors. Everyone’s financial circumstances are different, no two debts are the same, and the psychological approach you have towards debt can have a big impact on your choice of strategy.

The most important thing you can do is create a plan and stick to it. Work out which strategy you want to use and decide on a realistic and affordable way to start taking control of your debt.

And remember that if you need help, the National Debt Helpline provides a free financial counselling service. For independent and confidential advice, phone 1800 007 007.

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Isaiah James Peralta

Isaiah is a Personal Finance Publisher for finder.com.au, when comes to Credit Cards and Travel Money, you're speaking his language. His forefront value is genuine help, and empowering users to make better informed decisions is almost quite simply, second nature.

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NAB Personal Loan Unsecured Fixed

An unsecured personal loan with a competitive fixed rate that you can make additional repayments to without penalty.

SocietyOne Unsecured Personal Loan

Based on your risk profile, you will receive a tailored rate between 7.5% and 20.49% with a SocietyOne personal loan.

Westpac Unsecured Personal Loan

Borrow up to $50,000 for a term of up to 7 years with this unsecured loan.

Pepper Money Unsecured Fixed Rate Personal Loan

Apply for up to $50,000 and receive conditional approval within minutes. Interest rates range from 9.99% p.a. to 21.74% p.a. The rate you are approved for depends on individual circumstances.

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